President Barack Obama’s nominations for the Federal Reserve Board of Governors — Janet Yellen, Peter Diamond, and Sarah Bloom Raskin — foreshadow failure at the Fed, and economic disaster for the United States, writes columnist Amity Shlaes.
“This trio makes sense only if you believe the philosophy of John Maynard Keynes,” says Shlaes, a senior fellow at the Council on Foreign Relations, and author of a best-selling history of the Great Depression, "The Forgotten Man."
“All hail Keynes. That’s the message.”
According to Shlaes, what makes Obama’s picks “odd choices” is that the events of the past five years don’t exactly make Lord Keynes’s government deficit spending philosophy look good.
“Other schools of economic thought come to mind instead. One is the public choice school, which holds that Keynesianism uses crises as pretext to enlarge governments,” she writes.
Recent history, what is more, the columnist notes, also validates the premise of traditional, laissez-faire Austrian economics.
“This camp asserts that government involvement in markets is inherently dangerous. Austrians were among the first to warn that the hybrid status of government sponsored enterprises like Fannie Mae and Freddie Mac could lead to disaster,” says Shlaes.
The free market school notes that government doesn’t have to be the only creator of currency, an idea that is quite plausible in the era of PayPal.
“These economists assert that monetary authorities often push interest rates too low, causing distortions that lead to violent economic crashes,” writes Shlaes.
Back during the 1930s, Keynes introduced the idea that a government’s relationship to a nation’s economy should be like that of a mechanic working on a car.
“The mechanic is performing constant tune-ups on the engine, always weighing trade-offs,” Shlaes says. “Today the Fed is deeply divided between those who would feed the economic engine a large amount of Keynesian oil and those who would use slightly less.”
Obama nominated Yellen, president of the San Francisco Fed, as vice-chairman, to replace Don Kohn, who is stepping down in June. Obama is also seeking to appoint Raskin, a Maryland state banking regulator, and Diamond, an economist at the Massachusetts Institute of Technology, as Fed governors, completing the seven-member board.
Yellen is a Fed insider known for dovish views on monetary policy, fearing the risk of inflation spikes less than the danger posed by sluggish growth and high unemployment. Her move to vice-chairman is not expected to alter U.S. monetary policy, since her views are generally similar to Kohn’s.
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